Zara Owner Inditex Bucks Retail Trend As Sales Boom

Fashion giant Zara's owner Inditex reported an 80% jump in first-quarter profit on the back of soaring sales as consumers refreshed their wardrobes after months spent stuck at home during the pandemic lockdowns.

Zara has benefited from successfully passing on higher prices to shoppers despite a cost of living crisis squeezing margins at other retailers.

The company will continue to increase prices in markets affected by inflation during the second quarter while keeping its clothes affordable, CEO Garcia Maceiras told analysts on Wednesday.

"We continue to expect pricing to contribute to 2022 Spring/ Summer sales in a mid-single digit with no impact on volume," he said.

The company reported net profit of 760 million euros ($812 million) for the quarter to end April, in line with analysts' expectations. Sales rose 36% to 6.7 billion euros, surpassing pre-pandemic levels, while its gross margin hit a 10-year high.

Inditex shares were up 5% in afternoon trading, giving the business a market valuation of over 70 billion euros.

But analysts are concerned how long the fast fashion retailer can continue with price hikes without impacting demand.

Its sales growth decelerated at the start of the second quarter but remained robust. Spring-summer collection sales were up 17% between 1 May and 5 June 2022, excluding exchange rate changes, the company said.

"I believe Inditex will increase prices further as the year progresses given the wider cost issues across the industry, but the consumer reaction to this is still a major point of debate," Deutsche Bank analyst Adam Cochrane told Reuters.

INVENTORY GAMBLE

The company is building up its inventory to ensure supply chain strains do not result in stock shortages, Inditex said.

Some analysts said it was a gamble.

"This inventory-stocking has the potential to backfire if economic conditions continue to worsen and customers eventually close their wallets," said Hargreaves Lansdown equity analyst Laura Hoy. "For now that doesn't appear to be an issue for Inditex, whose trendy clothes continue to earn it a spot on dwindling budgets."

U.S. retailer Target is offering deep discounts to clear unwanted inventory, it said Tuesday, hitting shares in global retailers.

Inditex reported a gross margin of 60.1%, its highest in a decade, while operating expenses grew 24%, slower than sales.

Excluding a 216 million euro charge related to store closures in Russia booked during the quarter, Inditex reported a profit of 940 million euros.

The ongoing recovery in Britain, Europe and the United States helped Inditex make up for some lost revenue in Russia after it closed its 502 shops there in March.

Russia was Inditex's second-largest market in terms of shops and accounted for 5% of its sales growth between Feb. 1 and March 13, according to the company.

Beside Russia and Ukraine, the only market where Inditex's sales did not increase was China, where COVID restrictions affected 67 stores.

Online sales fell 6% from a year earlier, when many pandemic curbs were still in place. Inditex said it expected 30% of its total sales to remain online by 2024.

($1 = 0.9356 euros)